CRIS - Misc Lines - Ch.3 - Professional Liability Insurance in Construction

Covered Acts, Errors, or Omissions: Some insurers provide a broad blanket of coverage for _______________________________________.

"all of the professional services performed by the named insured."

Covered Acts, Errors, or Omissions: The scope of coverage available under the majority of A&E professional liability policies is determined by the policy's definition of __________________.

"professional services."

Key Coverage Issues for Contractors: Name 7.

- Covered organizations - Covered persons - Covered services - Covered damages - Covered projects - Coverage trigger - Key exclusions

Key Coverage Issues for Contractors: Covered Damages In most forms, the definition of damages merely stipulates costs that will not be considered covered "damages," including but not limited to the following. (7)

- Nonmonetary damages - Return of professional fees - Fines and penalties - Multiple damages - Punitive damages - Liquidated damages - Workers compensation benefits

Covered Acts, Errors, or Omissions: How the term "professional services" is defined?

- Some insurers define this term to include only those services listed in the policy application. - The named insured may be further required to warrant that this list is an accurate representation of his exposure. - Other insurers specifically list those services that the policy intends to cover.

There are two primary types of professional liability insurance used in construction: what are they?

- contractors professional liability insurance - architects and engineers (A&E) liability insurance.

Contractors professional liability insurance applies to a contractor's professional liability loss exposures that can range from _________________ to ___________________, such as that found in a design-build project.

- incidental design work - full design responsibility

Common "key" exclusions on contractors professional liability policies (3 examples)

- known events (events the insured was aware of prior to policy inception that have already resulted in, or are likely to result in claims) - claims by related entities - claims arising out of dishonest or fraudulent acts of the insured

Means and Methods of Construction: Even where the CGL and the contractors professional liability policies are written by the same insurer, contractors may—depending upon the specific circumstances surrounding a claim—have a big incentive to argue for coverage under one policy or the other. Why is that?

- since the CGL policy covers defense costs in addition to the limit of insurance, if the claim is likely to involve large defense costs or if the professional liability policy limit has already been eroded by other claims, the contractor may prefer that the claim be covered under the CGL, which will require showing that it arose from means and methods of construction. However, because the professional liability policy covers a broader array of damages, including pure economic loss, if the claim alleges damages for which the professional liability policy provides more extensive coverage, the contractor will desire for the claim to be considered professional in nature.

Section 3. 2 - Contractors Professional Liability Insurance

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Section 3. 3 - Architects and Engineers Professional Liability Insurance

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Section 3.1 - Professional Liability Insurance in Construction

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Name reasons contractors should not rely on their CGL as a primary source of design liability.

1) insurers often attach a professional liability exclusion to contractors' CGL policies that excludes coverage for claims arising out of the rendering of or failure to render professional services. 2) the CGL policy does not cover claims involving economic or passive losses that do not involve "bodily injury" or "property damage." Ex: CGL would not respond to "damages" associated with a waste treatment plant that cannot process the required amount of sewage, or a building with an HVAC system that cannot provide the required circulation to maintain acceptable temperatures throughout the building because these types of damages do not meet the policy's definition of "property damage."

Activities that Generate a Professional Liability Exposure: Six Questions - If the contractor's answer to any of the following questions is "yes," the firm likely has at least an incidental (i.e., minimal, but nevertheless one that exists and requires coverage) professional liability loss exposure.

1. Does the firm enter into explicit design-build or construction management projects? 2. Does the firm perform services for a fee that involve no "hands on" construction work? 3. If so, do these services involve skills or expertise that require special education, degrees, or licenses? 4. Could failure to exercise the appropriate degree of skill and care cause harm to others? 5. Does the firm have any licensed professionals—primarily architects or engineers—on staff, or does it ever contract with such professionals for services? 6. Does the firm ever lend employees to others for a fee?

Other exclusions in professional liability policies that can sometimes present difficulties to contractors.

1. Express Warranties or Guarantees. 2. Faulty Workmanship 3. Damage to Owned Property Exclusion 4. Contractual Liability 5. Pollution 6. Means and Methods of Construction 7. Mold

Common A&E Professional Liability Exclusions: Name 6

1. Related/affiliated entities 2. Contractual liability 3. Express warranties/guarantees 4. Faulty workmanship/own work 5. Products liability/own product 6. Workers compensation/employer's liability

Contractors entering into design-build contracts generally need to procure professional liability insurance to cover their design errors and omissions (E&O) exposure. Although contractors acting as design-builders may require their design subconsultant(s) to indemnify them for any liability incurred in connection with the design work, it may be unwise to rely exclusively on a hold harmless provision for protection. Name 5 reasons Contractors should procure their own professional liability insurance.

1. The hold harmless provision could be deemed unenforceable. 2. The design firm may not be in business when the claim is filed. 3. The design professional's insurance policy will rarely, if ever, cover contractual liability. 4. If the design firm's policy does cover contractual liability, the policy limits may be insufficient, since most design firms carry relatively low limits of insurance. 5. Most design firms have limited tangible assets that could be used to satisfy indemnity obligations if the insurance is inadequate.

Direct versus Vicarious Liability: Direct liability can be based on _________ fault or ________ fault.

1. active fault 2. passive fault

Key Coverage Issues for Contractors: Covered Services The insuring agreement in contractors professional liability policies typically incorporates the contractor's providing of "professional services" as a factor that triggers coverage. The two predominant methods of defining "professional services" is....?

1. to include a standard list of covered activities or services in the policy or... 2. to tailor the definition for each insured contractor based on the types of services it actually provides.

Coverage Trigger: What is the covered trigger for A&E professional liability policies?

Claims-Made

Key Coverage Issues for Contractors: Covered Organizations The organization named in the _____________________ is the "named insured" under the policy.

Declarations

What is the synopsis of the following A/E professional liability exclusion? Express warranties/guarantees

Excludes claims where the A/E has agreed to provide a higher standard of care than required by law. This includes claims "based upon or arising out of express warranties and guarantees."

What is the synopsis of the following A/E professional liability exclusion? Products liability/own product

Excludes coverage for claims arising out of products manufactured by the insured. The problem this exclusion presents for A/Es doing design-build work is that many of the procurement and installation processes that are integral parts of the design-build process would be excluded from coverage. Sometimes, insurers relax the wording of the exclusion as respects design-build projects.

What is the synopsis of the following A/E professional liability exclusion? Related/affiliated entities

Excludes coverage for claims brought against the insured by affiliated entities (entities with which the insured maintains a financial interest and/or management control). The purpose of the exclusion is to prevent collusion.

What is the synopsis of the following A/E professional liability exclusion? Contractual liability

Excludes liabilities assumed by one party in a contract that exceed the liabilities that party would have under common law.

What is the synopsis of the following A/E professional liability exclusion? Workers compensation/employer's liability

Excludes losses arising out of workers compensation claims. Traditionally these types of suits are covered under the design-builder's CGL policy, although some of these policies exclude claims arising out of professional services. Brokers representing larger design-build firms may be able to negotiate an amendment to the firm's A&E professional liability policy to cover these losses.

What is the synopsis of the following A/E professional liability exclusion? Faulty workmanship/own work

Excludes the cost of repairing or replacing bad work, which is considered a business risk that the insured must bear. The insurer's rationale for this exclusion is that the design-builder's motivation to be concerned about the quality of their work is reduced if the costs associated with correcting the work are covered by insurance.

Key Coverage Issues for Contractors: Covered Organizations Joint-Ventures and LLCs

Many forms also extend "insured" status to a variety of other organizations, such as the company's majority-owned subsidiaries that exist at the policy inception date. - sometimes automatically covered, other times, these organizations need to be listed on the Dec page or endorsement schedule - policies vary regarding joint-ventures. Sometimes coverage is automatic other times the joint-venture needs to be listed as a NI. - LLCs are not automatically covered under contractors professional liability policies. LLCs may need to be underwritten as separate entities and be subject to specific underwriting criteria.

Damage to Owned Property Exclusion: Contrary to most design professionals, this exclusion is problematic for design-build contractors because they are likely to be performing work at the construction site. Insurers may deny coverage on the basis that the site was "occupied" by the insured, or in the insured's "care, custody or control." How can contractors address this?

Most current contractors professional liability forms have addressed this problem by either removing the exclusion altogether, or removing the phrase "occupied by or in the care, custody or control" of the insured contractor. Alternatively, some policies may merely provide an exception to the exclusion for a "construction site occupied by the insured."

____________________________ insurance is needed to cover the passive losses arising out of design error and to cover the broad scope of activities that constitute professional services.

Professional liability

Which policy provision will preserve coverage for "innocent" insureds without the need to modify multiple provisions for that purpose.

Severability of interests provision - Some policies may include a severability clause as part of the basic form.

Example of when adding a Severability of interests provision is important.

When more than one insured is covered under the policy, it is important to ensure that the actions of one insured (e.g., intentional violation of a statute or code, discrimination, failure to provide proper notice of a claim) will not void coverage for other insureds who were not involved in the disqualifying actions. For example, if one insured knowingly and intentionally violates a civil or criminal code of conduct, the insured will not have coverage for any damages that arise out of that behavior. However, if an insured who had no knowledge of the violations also has a claim filed against it that is connected to the violator's actions, the "innocent" insured's coverage should remain intact.

Faulty Workmanship: Some policies provide an exception to this exclusion that preserves coverage in the event the faulty workmanship is the result of....?

a negligent act, error, or omission in the insured's performance of professional services. In other words, an error in designing a building—either on the part of the insured or the insured's subcontractor—would not fall within the scope of "faulty workmanship" so as to trigger this exclusion.

Pollution: For coverage to apply, the claim must first arise out of a covered _____________________ in the performance of professional services.

act, error, or omission

Active fault =

affirmatively acting or failing to act in a way that directly causes an accident and resulting injury or damage

Professional Liability policies differ from CGL and Auto policies in that Defense Costs.....?

are normally subject to the policy limit. - Most, but not all policies also indicate that punitive damages are covered to the extent permitted by law in the specific jurisdiction where a claim is made.

Most policies also cover "former" officers, directors, partners, and employees. Why?

because it is much easier to obtain cooperation in defending a claim when such persons are insureds under the policy.

Contractual Liability: If there is an indemnity clause in the contract, the damaged party is likely to assert both its common law and contractual rights to indemnification, and the mere existence of the indemnity clause would be less likely to result in a _______ ________ when this exception to the exclusion is in place.

claim denial

Professional liability policies are virtually always written with a _________________ coverage trigger.

claims-made

Key Coverage Issues for Contractors: Covered Damages Covered damages include amounts that ....?

constitute compensatory damages to claimants as well as defense and claims expenses.

Key Coverage Issues for Contractors: Coverage Trigger Since professional liability policies are based on a claims-made trigger, care must be taken to assure that coverage is _______________.

continuous

Key Coverage Issues for Contractors: Covered Services The definition of "professional services" in the insurance form itself should track with the definition of "professional services" in the ....?

contract between the contractor and its client.

Key Coverage Issues for Contractors: Covered Persons Coverage for additional insureds?

contractors professional liability policies rarely, if ever, provide coverage on behalf of additional insureds and underwriters will not generally include unrelated entities (e.g., other contractors) as additional insureds by endorsement.

Key Coverage Issues for Contractors: Coverage Trigger Assuring coverage is continuous involves....?

coordinating the retroactive date of the renewal or replacement policy with the expiring policy or purchasing an extended reporting period in the expiring policy.

Pollution: Most contractors professional liability policies contain either no pollution exclusion, or an exclusion with only narrow application. Where no pollution exclusion applies, pollution damages arising out of the rendering of covered professional services are ....?

covered as any other loss.

The key differences between a general liability and a professional liability insurance policy concern....?

covered damages, coverage trigger, and covered activities.

Defining the scope of covered services is even more challenging when issuing a professional liability policy for an A/E acting as a _______________.

design-builder.

"Pollution" coverage, therefore, applies primarily to claims alleging failure to......?

detect or quantify the presence of pollutants, recommendation of improper methods for extracting or containing pollutants, and similar allegations.

The allegations might include...?

errors and deficiencies in the designs and drawings supplied by the A/E, which resulted in the project being constructed in a manner not originally contemplated, and often unacceptable, to the owner.

What does adding a severability of interests provision to the policy do?

establishes that, except with respect to policy limits, the policy applies separately to each insured.

Passive Fault =

failing to properly supervise a subcontractor or to discover that a subcontractor is engaging in an unsafe or improper work practice

Most professional liability insurers do not intend to cover all loss exposures associated with a design-build project, particularly construction-related exposures such as ___________________.

faulty workmanship.

Covered Organizations and Persons: The covered organization on a Architects and engineers professional liability policy is the....?

firm named on the policy's declarations page or "named insured" under the policy. - if properly endorsed onto the policy, coverage also applies to joint ventures because joint ventures among design and engineering firms are common.

Faulty Workmanship: Faulty work is considered an uninsurable business risk that contractors must retain. Further, the quality of the work is considered a construction risk that would be the subject of ____________________ insurance, rather than a design risk to be covered under professional liability insurance.

general liability

Contractual Liability: Some policies go further, preserving coverage by exception to the exclusion, for liability assumed in certain types of contracts. This is a valuable coverage feature for design-build contractors who provide a ________________________________ to the owner for liability arising out of the work described in the design-build contract, including the providing of design services.

hold harmless agreement

Contractual Liability. Most if not all contractors professional liability policies contain a total exclusion. Even when there is a total contractual liability exclusion, the policy should include a phrase clarifying that it does not apply to liability the contractor would have in the absence of the contract. This avoids misunderstandings over the application of coverage when the insured would have an obligation to.....?

indemnify another party under the law even if there were no contract in place, as may occur when the design-build contractor's own negligence leads to the loss.

The purpose of architects and engineers (A&E) professional liability insurance is to provide...?

indemnity and defense protection to an architect/engineer (A/E) when another party (a third party, contractor, or owner) alleges professional negligence in the performance of the insured's professional services.

Contractual Liability: Note that a contractor should not agree to defend another party for liability, even for its own negligence, because ....?

insurers will not honor this

Key Coverage Issues for Contractors: Covered Persons Most contractors professional liability policies also afford coverage to former employees for liability arising out of their performance of duties for the insured. Why would they do this?

it helps to ensure their cooperation in a claim made jointly against the individual and the insured firm.

Mold: Mold has become a contentious issue in construction insurance. Because of the public health issues involved, the presence of mold in commercial buildings can generate significant bodily injury, property damage, and remediation cost claims. Accordingly, mold exclusions have become more common on commercial property and liability policies, including professional liability policies that cover design errors and omissions. (Mold is caused in part by water infiltration, which might be the result of a design error or omission.) This coverage may be available under a contractors pollution liability policy.

know this..

The policies also provide coverage to a number of individuals. Such persons generally include...?

officers, directors, partners, and employees of the named insured.

Professional liability policies are nearly always utilized in design-build projects. What is a design-build project?

one in which a single entity contracts to both design and build the project. Both design firms and construction firms have begun to offer design-build services, with each typically subcontracting out the part of the work that is not its area of expertise. The designer and the builder thus work as a team on all phases of the project to assure delivery of a quality, on-time facility or structure.

Means and Methods of Construction: Excluding coverage for damages arising out of acts that are part of the "means and methods of construction" is designed to eliminate....?

overlaps in coverage between the CGL and the contractors professional liability policies. - this type of exclusion is merely a clarification of the scope of coverage already laid out in the insuring agreement, which limits the policy's application to liability arising out of an act, error, or omission in the providing of professional services.

Key Coverage Issues for Contractors: Covered Persons Coverage is commonly extended to a variety of individuals, including __________, __________, ________, __________, ______, and ______ of the named insured.

partners principals directors stockholders managers employees ...of the named insured.

Occurrence coverage trigger =

responds to a claim based on when the loss causing the claim occurred rather than when the claim associated with the loss is made against the insured.

Express Warranties or Guarantees: This exclusion is designed to eliminate coverage when ....?

the design professional binds itself to a higher than normal standard of care.

Vicarious liability =

the liability of the principal (e.g., contractor) for the acts of its agents, such as subcontractors or architects or engineers.

Claims-Made Coverage Trigger =

the policy in effect at the time a claim is made must respond to the claim when it is made.

Key Coverage Issues for Contractors: Covered Services Professional services could include activities such as...?

the preparation of drawings and specifications, approval of materials, and supervision of the work.

Some experts argue that design-build is, by its very nature, a professional service contract. Therefore, unless the professional liability policy specifically excludes certain coverage, ....?

the professional policy must respond.

Professional liability policies, provide a much broader scope of coverage (covered damages are not limited to bodily injury and property damage), but for only one general cause. What is the cause?

the rendering of, or failure to render, the specified type(s) of professional services.

Pollution exclusions on professional liability policies are designed to preclude coverage only for pollution arising from ....?

the transportation and disposal of wastes.

Damage to Owned Property Exclusion: The intent of the exclusion is...?

to preclude coverage for "first party" property exposures that should be insured under builders risk policies.

Contractors professional liability insurance can be written on an annual basis to cover all of a contractor's operations or on a project-specific basis to cover a contractor's design liability on a specific project. (T/F)?

true

In design-build projects, A/Es may be required to agree to a higher standard of care. Owners often require performance guarantees that go far beyond a "negligence" standard of care. Even if the A/E is a subcontractor to the design-builder, these standards can be passed down through the subcontract. (T/F)?

true

Like contractors professional liability, architects and engineers professional liability policies rarely, if ever, provide coverage on behalf of unaffiliated entities that require additional insured status. (T/F)?

true

Professional liability policies are not standardized, so the scope of coverage can vary significantly from one form to the next. (T/F)?

true

Key Coverage Issues for Contractors: Covered Projects Contractors professional liability policies usually are written for a one-year period to cover all of the contractor's activities during that time frame. (T/F)?

true - This would be equated to a "practice policy" in the realm of architects and engineers, who buy annual policies to ensure all the projects undertaken by their practice during the year. However, some insurers will modify the policy by endorsement to apply only to a specific project.

The key to the complaint is that the A/E's negligent performance of professional services led to the ________________________________.

unacceptable consequences.

Contractors professional liability insurance was introduced as a specialized coverage to address contractors' .....?

vicarious and/or direct liability for design errors or omissions.

Pollution: Some of these exclusions are written in a manner to retain coverage for specified types of projects, such as "pollution" resulting from a wrongful act in connection with services provided for a ....?

wastewater treatment plant, potable water systems, or HVAC systems.